Guarantee All Bank Deposits

RDX : 說得好！ 這就是見識

One of the key elements of the government plan to rescue the financial markets is a backup for money-market mutual funds against losses. But Friday's announcement by the U.S. Treasury -- $50 billion promised from the Exchange Stabilization Fund -- is woefully inadequate to secure a $3.5 trillion industry.

Consider that just three days ago, on Wednesday, almost $100 billion was pulled out of such funds, sending short-term Treasury yields to Great Depression-Era lows of four-hundredths of 1%.

When investors fear that their "safe" assets, such as money-market mutual funds, are not secure, the entire financial system could face a rush to liquidity that would precipitate a crisis of equal or greater magnitude to the 1930s. If such a run recurs, the government must go further and unconditionally guarantee the value of money-market funds and bank deposits so that savers can, at their discretion, obtain U.S. Treasury securities or currency up to the full amount of their deposits.

Is this bold promise possible? Most certainly. Even though the total of these assets exceeds $10 trillion, the government has the power and the ability to convert all of these into government liabilities.

The U.S. Treasury can issue an unlimited number of Treasury bills to the Federal Reserve, and the Fed can turn an unlimited amount of these bills into Federal Reserve notes. These government securities will satisfy the demand of those who fear for the safety of their money, and wish to convert their assets secured by the U.S. government.

Critics of this plan will undoubtedly say that such an action will flood the financial system with liquidity and lead to hyperinflation, destroying the value of U.S. currency. This is dead wrong. An inflationary rise in prices is caused when individuals exchange their money for goods -- not by scared investors converting bank deposits or money funds into cash.

Reflect on what happened last Wednesday. The rush to liquidity was not motivated by those wanting to cash out their funds to go on a shopping spree or buy a yacht. Anxious investors just wanted to hold their assets in a form that will allow them to sleep at night.

Once confidence is restored, the money will flow back into the financial institutions. In fact, an unambiguous statement that the government will guarantee all such deposits and funds will allay investors' fears, and sharply reduce the probability of a liquidity panic.

Policy makers must heed the lessons of history. Had the Federal Reserve taken such bold actions in 1931, the run on the banks -- that caused thousands of financial institutions to close their doors and millions of Americans to lose their savings -- would have never occurred. We must not be stingy in backing up what investors count on as their safety net, whether these assets are issued by banks or money-market mutual funds. Our financial future depends on it.

Mr. Siegel, a professor of finance at the University of Pennsylvania's Wharton School, is the author of "Stocks for the Long Run," now in its 4th edition from McGraw-Hill.